Asia will become yuan zone: Stevens

RBA governor Glenn Stevens ... “There could be a profound adjustment for many countries in the region from membership of what is, at present, a de facto US dollar zone, to membership of an RMB zone.”
Photo: Michele Mossop

China’s yuan, also known as the renminbi, will almost inevitably become the dominant currency in Asia, creating big problems for countries in a region that now acts as a de facto US dollar zone, Reserve Bank of Australia governor
Glenn Stevens
predicts.

In a further sign that the RBA continues to be bedevilled by the high dollar, Mr Stevens hinted strongly that Asian central banks should use their savings for domestic investment rather than buying foreign securities.

The remark sends a strong signal about the governor’s concerns over increased demand for the Australian dollar, which is increasingly seen an adjunct to the US dollar and euro. In trade-weighted terms, the Aussie on Thursday hit its highest level since February 1984, further dragging on Australian exporters’ earnings and trade-exposed industries such as car makers.

“He’s saying there are opportunities for Asian economies to invest locally given their very strong growth prospects," Mr Salter said. “And a side benefit, one the Reserve Bank would be very happy with, would be less demand for the Australian dollar ... which is a quasi reserve currency."

Mr Stevens said it was unlikely that Asia would develop its own common currency, given the troubled example of Europe and the euro.

This would create space for China’s currency.

“It probably means . . . that unless something serious goes wrong in China, the RMB will eventually become the dominant currency in the region," Mr Stevens said in a speech to a finance conference in Sydney which was published on Thursday.

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“That may be stating the obvious, but there could be a profound adjustment for many countries in the region from membership of what is, at present, a de facto US dollar zone, to membership of an RMB zone."

Mr Stevens said the expansion of the yuan as the region’s dominant currency was already under way with the rapidly expansion of the yuan for trade settlement.

“Full development will require liberalisation of the Chinese capital account," he said. “This will presumably continue to occur, but on a timetable decided – as it should be – by the Chinese authorities."

The comments came as a survey of Australian companies showed they were preparing for more yuan trade settlement but were concerned about potential risks and inconvenience.

In his speech, Mr Stevens said it was likely that Asia would in coming years reduce the amount of savings sent abroad to buy supposedly low risk, yet low return, assets issued by the “old world".

“Why not deploy the region’s own saving at home, for higher return? It is not as though there are no productive opportunities in the region," he said.

“By most accounts, Asia’s infrastructure needs over the next couple of decades are very large."

China said on Thursday that its foreign exchange reserves had posted their largest quarterly increase since the second quarter of 2011.

The reserves surged by $US130 billion to a record $US3.44 trillion in the first quarter, a figure equivalent to the size of Germany’s economy.

Mr Stevens said there was a logic to Asia’s decision in the late 1990s to build foreign reserves. “But the cost benefit analysis is surely looking different today from 15 years ago."

“Perhaps there are now more direct routes to the destination of development and prosperity for Asia than there were a decade or two ago," he said.